Euro Can’t Hold the Highs

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Market Drivers August 23, 2016

EZ PMI hit 7 month highs
RBNZ waters down further easing
Nikkei -.61% Dax 0.74%
Oil $47/bbl
Gold $1343/oz.

Europe and Asia:
JPY Flash Manufacturing 49.6 vs. 49.5
EZ PMI 53.1 vs. 53.0

North America:
USD New Home Sales 10:00

The EUR/USD rose to fresh multi-week highs rising above the 1.1350 level in early morning Frankfurt dealing on the back on modestly better EZ flash PMI readings, but the pair could not hold those levels as profit taking kicked in by mid-morning session trade.

EZ PMI data came in mixed with French Services PMI jumping a healthy 2 points higher to 52 from 50.6 but with manufacturing PMI falling further into contractionary territory to 48.5 from 48.9 the month prior.

In Germany the readings were flipped with services PMI dropping slightly to 53.3 from 54.3 but manufacturing maintaining pace at 53.6 vs. 53.7 eyed. Overall the EZ PMI composite reading rose to a high of 53.3 which was its best level in 7 months. However, according to Markit “A slowing in manufacturing order book growth and a dip in services optimism led to a weakened rate of hiring and suggested that growth could fade in coming months, however. Inflationary pressures meanwhile remained muted.”

The EUR/USD popped to 1.1355 in the aftermath of French PMI readings but could not sustain those levels as selling in the EUR/GBP cross added to the downside pressure. Still, the pair remains near multi-week highs not so much on any organic demand for the unit, but rather as a result of dollar selling. The currency market remain highly skeptical of any Fed tightening and the greenback remains under pressure across the board.

The deep distrust in the FX market stands in sharp contrast to the fixed income market where yields on the benchmark 10 year bond have rallied nearly 10 basis points off the lows from last month. The divergence between USD/JPY and the 10 year bond is unlikely to last as two instruments are highly correlated. If the 10 year begins to respond to the more hawkish rhetoric of the Fed and sends yields above the 1.60% level it’s likely to pull USD/JPY along with it towards the 102.00 figure. For now however, both instruments appear to be trapped in tight ranges as the markets remain in deep summer doldrums, with most traders at the beach rather than their screens.

With a fairly muted eco calendar today that only carried Flash PMI and New Home sales data, the price action is likely to remain subdued for the rest of the day with EUR/USD trading the 1.1300-1.1350 range while USD/JPY continues to consolidate at the 100.00 level.

Boris Schlossberg
Managing Director

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